Fourth Bank Failure of 2019: City National Bank of New Jersey

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The Office of the Comptroller of the Currency (OCC) closed City National Bank of New Jersey on Friday, November 1st. This is just the fourth bank to fail in 2019. It came as a surprise to me since two banks had failed just the week before. Bank failures have become rare since 2017. There were no bank failures in all of 2018. Only eight banks failed in 2017. According to the FDIC press release on this bank failure:

On average, there are five bank failures each year in non-crisis times, according to FDIC data. There have been only three years since 1933 without a single bank failure.

It’s interesting to note that the FDIC slightly change this statistic from the previous week when the statistic read “On average, roughly five banks go out of business each year according to FDIC data.” It is true that many more than 5 banks a year should be expected to fail during and soon after a financial crisis period. The yearly number of bank failures increased dramatically in the last financial crisis, rising from 25 in 2008 to 140 in 2009. The number reached a peak of 157 in 2010.

The last part of the FDIC statistic remained the same: there have been only three years since 1933 without a single bank failure. Those three years have occurred during the time while I’ve been covering bank failures, 2018, 2006 and 2005.

The November 1st bank failure was typical. The FDIC was able to find another bank to assume all deposits.

According to this FDIC press release, “City National had approximately $120.6 million in total assets and $111.2 million in total deposits. In addition to assuming all of the deposits of the failed bank, Industrial Bank agreed to purchase essentially all of its assets.”

All deposits of the failed bank, even those above the FDIC limits, were transferred to the new bank as described in the FDIC’s FAQs:

No one lost any money on deposit as a result of the closure of this bank. All deposits, regardless of dollar amount, were transferred to Industrial Bank.

Both insured and uninsured deposits were transferred to Industrial Bank. Thus, even depositors who had over the insurance limits had no loss in these failures.

Occasionally, banks fail and uninsured deposits are not covered. That happened this year in the first 2019 bank failure. In that case, the acquiring bank only agreed to assume insured deposits. Depositors who had over the insurance limits were at risk of losing some or all of their uninsured deposits. In previous years, banks have also failed without an acquiring bank. In those cases, the FDIC liquidates the bank and sends checks to depositors of only their insured deposits.

For the November 1st bank failure, the only concern for depositors of the failed bank are those with CDs that had high rates. Those high rates may not last as the FDIC describes in its FAQs:

Interest on deposits accrued through close of business on Friday, November 1, 2019, will be paid at your same rate. City National’s rates will be reviewed by Industrial Bank and may be lowered; however, you will be notified in writing of any changes. You may withdraw funds from any transferred account, regardless of whether your interest rate changes, without early withdrawal penalty until you enter into a new deposit agreement with Industrial Bank.

Cause of the Failure

DepositAccounts.com had given City National Bank of New Jersey a “C” grade on its financial health based on data from its June 30, 2019 call reports. Its Texas Ratio of 36% wasn’t terrible. Typically, banks most at risk have a Texas Ratio near or greater than 100%. One thing to note about City National Bank is that the OCC had issued a Prompt Corrective Action (PCA) Directive last June which designated the bank as undercapitalized. This came after a 2018 Consent Order which required the bank to improve its capitalization. This was one of only two banks that were under PCA Directives, based on CalculatedRisk’s unofficial list of October problem banks. The other one on the list, Fort Gibson State Bank, was acquired without FDIC help by Firstar Bank.

The failure of City National Bank differed from the first bank that failed in 2019 and the last bank to fail in 2017. In both of those cases, fraud was the primary cause of the failures. Due to the fraud, the financial health grades didn’t help predict the failures. Also, the fraud caused the acquiring banks to decide to only assume the insured deposits. Customers at those banks with uninsured deposits were at risk of losing those deposits.

Those previous two bank failures were an important reminder why everyone should make sure that their deposits (total of both principal and interest) are kept below the FDIC and NCUA insurance limits at each of their banks and credit unions.

Credit Union Liquidations and Conservatorships

There have been no new credit union liquidations or conservatorships since my report on the two October bank failures. One credit union was liquidated in March, and two credit unions were placed into conservatorship in April and May. In a conservatorship, the NCUA takes over the management of the credit union with the goal of resolving the issues. If the issues cannot be resolved, the NCUA will either arrange for a merger of the conserved credit union into a healthy credit union or liquidate the credit union.

References:

Related Pages: bank health ratings

Comments
Predatory Depositor
Predatory Depositor   |     |   Comment #1
One thing that concerns me regarding bank failures is how a depositor can be assured that their deposits will deemed insured by FDIC or NCUA if they have more than $250k deposited and the bank is closed.

Suppose, for example, you have $500k in an account that has 2 POD beneficiaries. This account should be covered. But how can you be certain that the FI has proper records and those records comply with what the FDIC or NCUA will need to deem your account covered if the bank goes south?

My concern is that you may think you are covered, but you may not be.
111
111   |     |   Comment #3
# 1 - No, you can't be completely certain, and during the financial crisis I recall reading of a few sad situations where this did happen to people. The best you can do is to -
1) Carefully review what the FDIC or NCUA says on their websites about EXACTLY how these joint and/or POD accounts should be titled by the FI, and what records the FI should keep,
2) With that knowledge, when calling the FI insist that they title the account exactly, word-for-word, the way you request it, and,
3) When the FI has completed setting up the new account, insist that they mail you a copy of all documents that show the titling of the account, any joint account-holders, and any POD beneficiaries. And of course, hang on to these papers.
Right...
Right...   |     |   Comment #4
Someone actually knows the facts and what they are talking about. Exactly what I became aware of several years ago.

Trying to get it exactly what you need and want through the heads of some CSRs can be very trying sometimes.
Joe
Joe   |     |   Comment #6
Predatory Depositor, according to FDIC, you are suppose to have SS#'s on all POD members, also if SS#'s are missing, it may create problems with IRS should you miss to report the interest earned.
Predatory Depositor
Predatory Depositor   |     |   Comment #7
It would be nice to know exactly what information the FDIC and the NCUA *require" in order for you to be insured.

I think it's clear that if they have a beneficiary's name, address, date of birth, and social security number, that would be sufficient to guarantee you are covered.

But what if some of that information is missing? If for example, they don't have their social security number, or one of the other pieces of information, other than the name of course, would you still be covered?

And what if some of the information is wrong? For example what if it's not their correct address. I've had a number of FIs suggest, for example, that I use my own address if I don't want to or don't have theirs. Would that negate your insurance?

Of course it's desirable to have all of that information on record to make it easier for the beneficiary to claim the funds. But this is a different question, it's about precisely what information is *required* (not simply desired) to ensure coverage.
Shelby
Shelby   |     |   Comment #9
I recently spoke to the NCUA and was informed If the FI has the name of the Trust on File for the account or a copy of the trust thats what the NCUA will go by re; seeing the amount of beneficiaries on the account. If the account at the FI is a trust account then you are covered as the account holder will have all the named beneficiaries on record within the trust in their possession which can be provided to NCUA if needed. As far as POD accounts there seems to be no sure way if a FI goes under that FI will provide/even have a record of who the beneficiaries are on the acct. at the time of a FI failure or... In the case of GTE CU I do know on your account page they actually list the beneficiaries listed on the account and this info is avail. each time you log in.
Predatory Depositor
Predatory Depositor   |     |   Comment #10
The information about the trust make sense. The trust document will name the current beneficiaries, so if the FI has a copy of the trust in their records they also have at least the names of the beneficiaries. It's interesting to note, that the trust document may not include other information about them such as their addresses, social security numbers or dates of birth. Yet from what you're saying the account titled in the name of the trust will still be covered.

The main concern there, would be whether or not FI does indeed have a copy of the trust document in its records even if you provided it for them. You have no way of knowing that.

And especially in the case of a failed FI, I suspect it's not uncommon that their record keeping quality control is poor.

I don't have a lot of concern about this with the larger banks. It's the smaller banks and credit unions that concern me the most.

But of course the question I raised about what information is required to ensure coverage in the case of POD beneficiaries is applicable to any FI.
Shelby
Shelby   |     |   Comment #16
Re: Trust accounts ...NCUA stated to me the FI does not need to have a copy of the trust for the Trust to be covered by insurance.The Trust Account named needs to be registered as a Trust at the FI and the account holder needs to have same titled Trust in their possession at time of FI failure. NCUA will then reach out to the account holder if the FI doesn't have the document to see how many beneficiaries are named in the Trust. NCUA will then insure based on that number. If the Trust is amended once/or numerous times after the account is opened at the FI, NCUA will honor the trust that was in effect at the time of the FI failure. 
For larger deposit accounts over $250k at any FI the trust may be the easiest/and more secure route for the account holder as more control is placed in the hands of the individual. Again, if the account is titled as a trust at the FI ...thats all NCUA needs, the FI does not need to be in possession of the actual trust for funds to be insured.
Predatory Depositor
Predatory Depositor   |     |   Comment #34
#16
Great information and points in your post. I especially like your point about a formal trust giving the account-holder more control over ensuring they are covered if the information you gave is correct.

However, the main ideas of using a POD account instead of a formal trust is that it is supposed to be easier to create, more flexible and less costly. Of course all of that is meaningless if the insurance coverage fails. Very disconcerting.
111
111   |     |   Comment #11
# 7 - I wish I had a definitive answer to your question, particularly re. POD beneficiaries (and not formal trusts). What I've found is that surprisingly, you may not always get as specific information as you'd like from the regulators. I say this because of an experience I had with the Keesler CU 7-month, 5% CD from Fall 2018 (which many folks on DA bought). Due to unusual circumstances I put a lot of funding into that one, and chose to use several POD beneficiaries to create sufficient insurance. I did not want to put down SS nos. for a couple of them, and the beneficiaries weren't thrilled with this either, for privacy reasons. (I was more concerned with Keesler's longevity than my own - but then, this was only a 7-month CD!) Of course I had names, also addresses and dates of birth. At one point I'd been informed that Keesler required SS nos., so I actually called the NCUA to see what data they (as Keesler's regulator) "truly required" for POD beneficiaries, should Keesler fail during this period.

Their answer was "full name" (no surprise there), and "whatever else is needed to completely identify and locate the beneficiary". OK, I asked, what does that really mean? Does it mean that with name, address and DOB I also MUST include SS no.? Well no, they said, that's not an NCUA requirement, as long as they can be identified and located otherwise. So then I asked, as Keesler's regulator, do you have the authority to inform Keesler that they cannot INSIST that I provide SS nos. of beneficiaries to Keesler, since the NCUA itself does not require them? Well no, they said, they really couldn't require Keesler to do that either. Keesler could require beneficiary SS nos. even though the NCUA does not require them for ID purposes, and the NCUA could not force Keesler to NOT require them.

So the answer was somewhat mushy. As it turned out, when I called Keesler they said their requirement of SS nos. for POD beneficiaries "was not absolute", and they backed off on this since I provided name, address, & DOB. As it turned out, I lived, Keesler lived, Keesler paid off, and everything was, and is, copasetic (but then this was only a 7-month CD!).

Having said all that, from what I read about situations that actually happened with bank/CU failures during the financial crisis, it seemed that incorrect titling of accounts (including CD accounts) was the primary reason why some depositors were denied the higher insurance levels. In some cases titling of accounts had not included "POD", "TOD" (transfer-on-death), "FBO" (for-benefit-of) or some other accepted beneficiary designation or acronym, even though customers had requested that this be done, from FIs that later "went bad" and were taken over by the FDIC or NCUA. In other words - incorrect titling of accounts, rather than inability to locate POD beneficiaries, was the main problem. But, YMMV.
Predatory Depositor
Predatory Depositor   |     |   Comment #13
This would be an excellent topic for a DA article listing precisely what elements are necessary to ensure that an account is insured.
Predatory Depositor
Predatory Depositor   |     |   Comment #14
Banking regulations are very complicated. Even though the insurance is offered by FDIC and NCUA at the federal level, the requirements might still be affected by individual state regulations. If so, ensuring that you are covered may be an even more complicated matter.

There is a real need for a definitive clarification of the details.
Right...
Right...   |     |   Comment #15
There is a lot of confusion of what information the FDIC and NCUA require and what various FIs demand when it comes to listing PODs.

Many FIs make up their own rules and you either accept them or not. However, the more information the FI has, the easier it is for them to locate and verify the identify of the beneficiaries named as PODs. Of course that then leads to privacy concerns or information just not being available.
Predatory Depositor
Predatory Depositor   |     |   Comment #17
There are a number of aspects to this topic. Insurance coverage is only part of it. But it's a critical part. Nothing could be worse than to find out your account was not insured after an FI failure when you thought it was because of some technicality.

There is a real information gap here, especially with respect to non-formal types of trust accounts such as POD.

The FIs cannot be relied upon to give you the correct guidance nor are they responsible for doing so or the ones who will ultimately pay the price if something goes wrong. It's up to you to ensure everything is right.

But how can you ensure everything is right, if you don't know the requirements. I think this is a potentially big problem.

I'd like to see something that focuses in on this particular part of this topic for both FDIC and for NCUA. Exactly how must a POD (or similar non-formal trust) be titled and exactly what information must be on record for each named beneficiary to ensure that the account is covered for purposes of FDIC or NCUA insurance?

Again, I am not asking what is desirable, but what is *required*.

Note that the answer *may* vary by state which would create a very difficult situation since it would probably mean that it depends on the state the FI is located in.

Whatever the case is, there needs to be a clear answer to this question, and I have not found one.

In the absence of such information, I think the best strategy would be to provide name, address, DOB and SS# for every beneficiary. It seems certain that this would be sufficient to ensure coverage. But if any of that information is missing or inaccurate, it seems UNcertain.

Also, address (and even name) can change. So what happens if you fail to update say the address? So again, I think if you want to have the best chance of success you must keep this information current.

There is potentially a lot of administrative work here just managing beneficiary information especially if there are many accounts involved. And yes, particularly with SS#s there are also security and privacy issues. But let's start with the requirements to ensure you account is covered. What are they?
Right...
Right...   |     |   Comment #18
What is required by the FDIC and NCUA? I don't believe anybody on this forum really knows for certain. And if they do, who knows who is giving the correct information? Your best bet is to go to the source and not rely on a blog site of critical financial information.
Predatory Depositor
Predatory Depositor   |     |   Comment #20
#18 I agree. I'm not suggesting we resolve it in this forum. I am just raising the question as I think it's something everyone here who deals with POD accounts should be interested in.

I think it would also be a good topic for a DA article.
highrate
highrate   |     |   Comment #21
many banks and credit unions don't require ssn on the beneficiaries. An example is Ally bank which doesn't require ssns
Predatory Depositor
Predatory Depositor   |     |   Comment #22
Yes, some banks require social security number for each beneficiary and others don't. The question is whether the FDIC and the NCUA require Social Security numbers for each beneficiary in order to count them towards insurance coverage.

Just because the FI does not require you to provide a Social Security number, does not necessarily mean that the FDIC and NCUA do not require it.

My suspicion is, and this is just a guess, that Social Security numbers for beneficiaries are not required and your account will still be insured provided you have the rest of the required information. But that's just a guess.
highrate
highrate   |     |   Comment #23
I will email them today and see what they say
highrate
highrate   |     |   Comment #25
NCUA just got back to me. ssn's are not required. I am waiting to hear back from fdic
Predatory Depositor
Predatory Depositor   |     |   Comment #29
Good to know. I had a feeling that was the case, because I've had some clues in the past.

Have you asked them exactly what is required?
Norbert
Norbert   |     |   Comment #2
If a bank on the verge of failure isn’t a Grade F, then C should be noted as your worst grade.
kcfield
kcfield   |     |   Comment #8
The bank is grade E- with Weiss Ratings, which is, in my experience, more conservative and accurate in their grading.
kcfield
kcfield   |     |   Comment #5
This bank had an "E-" rating with Weiss Ratings which is the most accurate bank rating site. No surprise at all here.
JRA
JRA   |     |   Comment #12
Actually in a revocable trust which is quite simple and extremely common among all folks( especially the incapacity clause that covers your care and wishes in the event of an illness where can’t speak your wishes for care)you can have 5 or 6 final beneficiaries and 5 times 250,000 or 1.25 million with 5 listed. Tod or Pod, both are great.Never boast about a rate as I did because that PSECU 3.25% rate for years that was due to last until 11/30 is gone! Have a good week all and this site is superb??
Mark
Mark   |     |   Comment #19
PODs are always in danger of being denied should the LAST WILL or TESTAMENT does not matches the POD's members. There is always a challenge either by the inheritance(s) in the WILL or the POD''s persons. The intend of the creator of the POD can not be determined should there are siblings not named in the POD.

Also, the IRS has stake in the POD of who is going to pay the taxes and if IRS get involved, attorneys get involved too and there goes the money to the attorneys and the courts.

There are FIs that do not register properly the POD account(s) and that can create another issue(s) with the FDIC and NCUA, you can never know if the POD is correctly registered or not, I have been told that if the SS numbers of the POD members are missing, the POD can not be legally registered with that FI do to IRS regulations (anti laundering money statute).

The best thing to do or what I have done, is to open as many as you like accounts as joint tenancy or tenancy in common with any individual you intended to do with the POD, but separate with each individual. This way no POD registration is required and no WILL can nullify the intend of the owner of the money, each individual is granted separate account that they can continue to use as their own after a demise of the account creator.
Predatory Depositor
Predatory Depositor   |     |   Comment #31
My understanding is that a POD account supersedes a will and that therefore, assuming the POD account is properly set up, the funds in that account are owned by the beneficiaries at the time of the account holder's death regardless of what the will says. Unlike the will the proceeds of the POD account are not subject to probate.

The sticky part is understanding whether the POD account is setup correctly. From what I've seen, FIs seem to be very casual about making sure they're properly executed. That's scary.
Michigan
Michigan   |     |   Comment #24
Very helpful information??
losingtrader
losingtrader   |     |   Comment #26
I can provide you with answers regarding the POD and uninsured issues as I researched this during the financial crisis, read the applicable law and court cases, and spoke with the NCUA general counsel. The law which increased deposit insurance to $250,000 also retroactively covered uninsured depositors at IndyMac --at a time when deposit insurance was $100,000. (see https://www.latimes.com/archives/la-xpm-2010-jun-16-la-fi-fdic-indymac-20100616-story.html)

For FDIC insurance coverage the titling of the account has always been essential. The styling of the account should be "John Smith POD Jane Smith , Joe Smith, and Sarah Smith" as an example.
Unless applicable administrative law changes have been made since I last checked, proper account titling is essential at a bank, regardless of the depositor's clear intent as evinced in other bank records. There is an administrative law case on point.

For credit unions, the styling of the account would be preferable, but NCUA will look to any proof that there was a revocable trust created in the institution's records..

Best practice is to title the account with all insureds.

You should note that uninsured depositors have preference over general unsecured creditors.

I also happen to know , from personal experience as a bank board member, FDIC will look to the board members to cover any uninsured losses, and if they fail to do so will not allow them to serve as a director on another insured bank board. If the original investors and board members are wealth members of the community with high name recognition it is very likely they will make up any loss the FDIC would otherwise suffer, lest their names end up in the local paper....in an area where there may be uninsured depositors. No bank director wants his or her good name wrecked by being labeled a deadbeat.
Ginn
Ginn   |     |   Comment #27
losingtrader, the LA article has nothing to do with PODs and it is 10 years old. FDIC and NCUA have changed their requirements for PODs and the title is not the only requirements, if the SS# are missing, the whole POD may be invalidated from the IRS point of law, should the creator of POD is no linger living or the taxes were not paid before the distribution of the funds. PODs can be challenged in court of law if a sibling or a spouse is left out of it.
losingtrader
losingtrader   |     |   Comment #28
Ginn,

The LA Times article is on point because it covered cases where IndyMac employees had told depositors there would be additional insurance , but there was none because accounts were improperly titled. I should have mentioned that.
I would appreciate a reference to the FDIC regulation requiring a social security number for additional insurance. My reference is 12CFR 330. I can find none requiring a social security number.
The IRS has nothing to do with whether the deposits are insured.
As to the "creator of the POD is no longer living" that's the entire point of the Totten Trust...to pass money to named heirs in the event of death of the testator. Perhaps you mean one of the beneficiaries?
As far as taxes being due, I'm not certain what you mean, unless you are dealing with an estate in 10 figures , which might incur estate tax.
Finally, I think your last point refers to certain states prohibiting exclusion of relatives from an estate. That issue is well beyond the scope of the issue.

Best
Laura Lez
Laura Lez   |     |   Comment #38
The article states nothing about "IndyMac employees had told depositors there would be additional insurance , but there was none because accounts were improperly titled."

There is no indication the account owners understood the insurance limits, or tried to ensure those limits were extended.
Predatory Depositor
Predatory Depositor   |     |   Comment #30
"...but NCUA look to any proof that there was a revocable trust created in the institution's records."

Do you have any sense what could constitute such proof? How about a signature card with the beneficiaries named?

This is very good information, but still unanswered is what specific information is required for each beneficiary.
Predatory Depositor
Predatory Depositor   |     |   Comment #32
Between a lack of readily available specific information about how to properly set up a POD account so that you are assured insurance coverage in the event of the failure of the FI, and the seeming inattention to these details on the part of the FIs when establishing an account, it seems to me there is a gigantic problem here. There may be a lot of customers who think they are insured when they are not.

Both the FDIC and the NCUA provide coverage calculators, to help you determine if you have the right amount of beneficiaries divided up among the right accounts and the right number of banks to ensure that you are covered.

But it appears that those aren't going to help you if your account isn't set up properly. There may well be something on their websites which lists the requirements to ensure coverage as I have not explored their sites. In the brief time I did spend there I didn't see anything like that.

It seems as if they are counting on the financial institutions and not the depositors to get those things right. But I think there is evidence that the financial institutions are not doing this. So it appears to me, unless I'm missing something, which is entirely possible, there's a big mess brewing here. Seems like it's crying out for some sort of regulatory reform on this issue. For those who rely on POD accounts it's downright scary. How can they comply with the requirements when they can't even find out what they are?
#33 - This comment has been removed for violating our comment policy.
Predatory Depositor
Predatory Depositor   |     |   Comment #35
Here is the FAQ page including information about NCUA coverage for POD accounts on the mycreditunion.gov site.

Scanning it I don't see any specific information about required titling of the account or what specific information is required for each beneficiary.

This is very disconcerting. It is sounding like only an attorney who specializes in banking regulations or similar and who also has some very specific knowledge of the subject could properly ensure that a POD account is properly registered. Yet both banks and credit unions casually set these things up assuring depositors they know what they are doing, and even government web sites seem to encourage consumers to use this method without even giving them full information as to how to do it. Unless I am missing something there is a serious disconnect here.

https://www.mycreditunion.gov/share-insurance-estimator-faq
saver420
saver420   |     |   Comment #36
reposting this here as well - thanks So I need guidance from you guys. I reclassified my regular share as tentative trust as that was the only way I could state beneficiaries for the CDs which are very important to me to extend NCUA insurance coverage. The account was reclassified and you can only see it being a tentative trust only on e-statements. HOWEVER beneficiaries are not published or can be viewed anywhere. Looks like you can get oral confirmation by somebody in APPLICATIONS department but for your comfort and peace of mind there is no written visual anywhere like I have with ALL my other banks and CUs. Can somebody confirm if I have been misinformed here? How do you guys get comfort in this situation? Thanks for your help.
saver420
saver420   |     |   Comment #37
sorry the above post relates to PSECU.....thanks
highrate
highrate   |     |   Comment #39
you need to contact them and get something in writing that the pods have been added
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